How the ‘ultimate fund’ was created

By Oliver.bradley

Created 30/08/2010 - 10:48

Today alternative Ucits III structures are very much in vogue, but the SEB Asset Selection Fund traces its origins back more than five years, to a train journey to northern Sweden in March 2005. My team of five spent the seven-hour journey on a brainstorming session to devise what we called the ultimate fund, the one into which we would put all our own money.

The team came up with a hybrid between a traditional hedge fund and a mutual fund, combining the best features of each in what later would become known as a ‘Newcits’. Our goal was to seek absolute returns, always trying to make money whatever the market conditions – while recognising that this is not always possible – and using both long and short positions. From the mutual fund world we took the idea of transparency, with valuation and liquidity on a daily basis. To provide access to investors anywhere in the world, we opted for the Ucits framework rather than an unregulated fund structure.

The final element was the fund’s strategy. Between 5 and 20 per cent of the returns of any portfolio can be attributed to security selection decisions, whereas 80 to 95 per cent is down to allocation decisions. At the time, about 99 per cent of all mutual funds were relative return products that followed a benchmark and whose managers spent their time making security selection decisions. We thought there should be great scope for a fund focusing on allocation.

Although our discussion started out as a fantasy exercise, by the time the team got off the train we were convinced we should launch this fund. Once this eventually happened in October 2006, we discovered it had a high correlation to managed futures and found factors that other managed futures players had been playing for a while. Although it wasn’t what we originally intended, in effect we invented the first CTA Ucits fund. With USD1.9bn in net assets, it’s the largest CTA fund in the Ucits world. Compared with unregulated hedge funds, it would rank among the largest 1 per cent of hedge funds globally, according to Bloomberg.

Our vision was vindicated by events in the market since the fund’s launch. At that time there was a roaring bull market, but in mid-2007 there was a massive shift in fortunes between equity- and bondholders. That allocation is the most important investment factor has been proven very clearly over the past three years.

Since then the concept has evolved and expanded. The original SEB Asset Selection fund is a medium-risk product that targets 10 per cent average volatility over three to five years. However, some potential clients wanted a lower-risk product, so we launched a 5 per cent target volatility product, SEB Asset Selection Defensive, in June 2009, and subsequently added SEB Asset Selection Opportunistic, a 20 per cent target volatility fund particularly favoured by funds of hedge funds seeking more high-octane investments.

SEB Asset Selection now has distribution approval in countries including the UK, Italy, France, Germany, Switzerland, Netherlands, Spain and the Nordic nations, and is now seeking authorisation in Asia and Latin America. The fund born years ago on a train in northern Sweden has crossed Europe and embarked on a journey to more distant regions. Competitive performance and Ucits made it possible.

Hans-Olov Bornemann is head of the global quant team and manager of the SEB Asset Selection Fund at SEB Asset Management